Flaws in the Efficient Market Theory :: Economy

Flaws in the Efficient merchandise place suppositionAccording to the Efficient Market Theory, it should be extremely ticklishfor an investor to develop a scheme that consistently selects roues thatexhibit higher than principle returns over a period of time. It should alsonot be realizable for a company to sterilize the books to misrepresent the valueof stocks and bonds. An analysis of occurrent literature, however, indicatesthat companies can and do beat the system and manipulate information to figure out stocks appear to perform above average. An understanding of theunderlying inefficient world factors in the mart equation is necessaryin order to government note for the flaw in Efficient Market Theory.Efficient Market Theory A Contradiction of TermsEfficient Market Theory (EMT) is ground on the premise that, attached theefficiency of information technology and market dynamics, the value of thenormal investment stock at any given time accurately reflects the realvalue o f that stock. The price for a stock reflects its material underlyingvalue, financial managers cannot time stock and bond gross sales to takeadvantage of insider information, sales of stocks and bonds provide notdepress prices, and companies cannot cook the books to artificiallymanipulate stock and bond prices. However, information technology andmarket dynamics are based upon the workings of ordinary people and differentorganizations, neither of which are arguably efficient nor consistent.Therefore, we have the basic contradiction of EMT How can a theory basedon objective automatic efficiency hold up when applied to subjective humaninefficiency?As a case in point, America Online (AOL) offers a classic fashion model of howinvestors can be misled by a company that uses the market system againstitself. AOL, up until early November of this year, utilise an accountingsystem that effectively cooked their books and provided guidefigures on the companys performance. Instead of acco unting for itspromotion expenses and costs as a regular expense, as normal companies do,AOL spread them over two years. This let AOL report annual acquire based onrevenue figures derived from denying actual expenses (as cited in Newsweek,November 11 edition).By deferring those costs, AOL over the years reported profits $385 milliongreater than they would otherwise have been. The company then used thesenon-existent profits to promote itself as a money-making opportunity forboth stockholders and authorization investors, artificially increasing itsstock prices. This accounting practice is perfectly legal, solely theinformation was kept private for over two years. The company has latterlyannounced that, effective immediately, promotion expenses will be chargedto gelt as the expenses are incurred, the way a normal company does.AOL will also take a one-time special charge of $385 million for the